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20 Mar Can digital save the oil sands?

Some large oil companies are sending signals that Canada’s oil sands may be heading towards an early exit. Can digital extend the life of oil sands a little longer?

What are the signs of impending doom?

You could be forgiven if you read a few newspapers and concluded that the oil industry has decided that the oil sands are not worth pursuing. Numerous reports place the oil sands high up on the cost curve of global oil resources, with their high capital costs and long time lines, suggesting that they may be among the first to be stranded.

Several high profile global oil and gas companies such as Shell and Statoil have sold their oil sands investments to Canadian companies such as CNRL and Athabasca Oil Corporation. Many oil sands projects have been either cancelled, slowed down or shrunk. Industry executives have openly speculated that some of the resource may not be produced, despite public policy to produce it all. Even Exxon announced that it was writing down the value of its oil sands investments to reflect the prevailing low oil price. Exxon rarely writes down its oil assets.

On inspection, these are simply rational business decisions. I would observe that so far, at least for those companies selling, there has been a willing buyer. The price paid might not be as frothy as the values that the industry has seen in the past, but at least there’s been a sale. The buyers obviously think the oil sands assets have value and therefore will be produced. Given that not all oil sands are created equal – some are easier and cheaper to extract than others – some oil will be left in the ground, but the buyers clearly think these particular assets are unlikely to be stranded.

And write downs can often just be the result of accounting and regulatory policy, as it has been in the case involving Exxon.

Are the oil sands worth saving?

I like that quote from Canada’s prime ministerabout the oil sands. No country would would find 173 billion barrels of oil in the ground and just leave them there.

Quite correct, Mr Trudeau. It is a fact that resources will always seek a market, and Canada’s oil sands are no different. Entrepreneurs will invest to find pathways for resources to get to market, sometimes in surprisingly creative ways. Did you notice this clever new bitumen shipping solution developed by that famous oil and gas infrastructure company, CN?

Our dear Republican friends south of the border get it, and have permitted the long-stalled Keystone XL pipeline project to get going. The Republicans have also cleared the way for the disputed Dakota Access pipeline to be constructed, a sign that American resources will find a way to market.

Energy system transitions take a very long time to realize. The shift from wood to peat, and from peat to coal, and from coal to oil typically take 50 years or more to materialise. This makes sense to me. The energy system is in the very minutia of every element of our day to day existence, and we would all need to make specific and personal changes to move our energy sources. It will take a couple of decades or longer to replace every car, truck and train with something that doesn’t use petroleum, along with all the refueling stations out there.

So the oil sands could have value for 50 years or more.

Staving off extinction

If oil sands are to survive, however, they must become as cost effective as the next best alternative petroleum resource, and as socially acceptable. Otherwise all the investment will head to that lower cost resource and simply starve oil sands from investment capital, before the 50 years are up.

What does that mean? I think of it in terms of 5D’s:

Decarbon

All businesses today are under pressure to reduce their carbon footprint. Oil sands production generates more airborne carbon than other resources because it takes heat to extract the bitumen, and that heat is generated today by burning fossil fuels.

Dewater

Water resources are under strain around the world, and while Canada is blessed with an abundance of water resources, oil sands extraction and processing uses water (for steam or separation), and more water than what communities and society now accept.

Deman

Despite the relatively few jobs in oil and gas, the industry is still designed around people, and the presence of people in a dangerous industry drives a high overhead cost in safety, training, equipment configuration and housing, and the work force commands high salaries as a result.

Dewaste

The oil and gas industry does not change quickly because of the hazardous, 24/7 nature of its operations. As a result, work practices long abandoned in other industries live on in oil and gas and are now wasteful of resources.

Devillainise

The industry has lost its historic level of social acceptance and is now viewed as a villain in a world seeking to cool off. Since the industry will be around for another 50 years, it needs to reverse this perception.

The digital life lines

The digital revolution sweeping the globe can throw a few key life lineto help the oil sands cope with the big Ds. Here’s what I think are the critical few that can make the most difference.

Analytics

The biggest and most important life line digital technology is analytics. Not only do oil sands companies have mountains of data to work with already, it will be analytics that helps identify carbon reduction possibilities, water usage enhancement, social and community impacts, and general waste reduction. Fortunately, oil companies have lots of analytical knowhow. The data resource needs work to make it more reliable, more easily accessible, more transparent. But I would begin with setting an analytics strategy as an enabler to the other life lines.

Artificial Intelligence

All that data, coupled with good analytics, is great, but is made even greater with automated decision making, or what the digital industry calls artificial intelligence. AI is what can take many of the mundane and routine decision making and related human response out of the business model permanently. That helps reduce manning levels.

Smart assets

Inexpensive sensors will make all kinds of invisible equipment visible (that is, sensors that broadcast asset whereabouts, operating state and condition). That will reduce the need for human operators and inspectors, but will inflate data volumes and drive the need for better analytics.

Automation

To take people out of the field means a much higher level of automation than exists today. Aerial drones (a particularly good example of a smart asset) that supervise, inspect and monitor field equipment from the air will provide solid leverage and reduce field resources. In time, equipment, plant and vehicles will become automated (we can early signs in the form of automated mining equipment). Anything with a chair in it today (and anyone whose job is to sit in that chair) is on a sunset path.

Taking people out of the office is another demanning goal. In the office, the automation technology poised to make an impact is called Robotic Process Automation (or RPA). This automation technology mimics human keystrokes as they work with classic office tools like spreadsheets. RPA is coming soon to finance, field accounting, JV accounting, tax and royalty processing, compliance reporting, and contract management.

Cloud computing

What makes the data, analytics, artificial intelligence and automation come to life is cloud computing. All that data and compute horsepowerneeds a home, and there are now 3 huge cloud vendors (Amazon, Microsoft and Google) who have made enormous investments in green data centers, cyber security and compute horsepower on demand. If banks can move their business to the cloud, so can oil companies.

Blockchain

The role of blockchain will be to transform key process chains in capital projects, sourcing, product sales, and compliance. The amount of waste in oil company process is still substantial even after all the downsizing of late, because the processes that incorporate wasteful practices have not been themselves transformed. Blockchain applications are the next big transformation tool to remove overhead costs from business processes.

ERP

You might not think that a 30 year old technology qualifies as digital, but the next generation of ERP systems incorporate the latest in digital technology – in memory computing, cloud, analytics, mobility, wearable. They will be profoundly digital and will unlock dramatic process and productivity improvements, provided companies are serious about taking full advantage of ERP capabilities.